What is Algorithmic Trading? Concepts & Best Example 2022

On December 9, the capital markets watchdog, the Securities and Exchange Board of India, issued a consultative document stating that it was proposing a regulatory framework for algorithmic trading by individual investors. Many people, however, are unaware of What is Algorithmic Trading and How Does It Work? Let’s take a closer look at Algo trading meaning, including an example and other elements.

What is Algorithmic Trading?

Algorithmic trading involves placing a deal using a computer programme that executes a sequence of commands (an algorithm). It is also known as automated trading, black-box trading, or algo trading.

In concept, the trade can make profits at a pace and frequency that would be hard for a normal trader to execute. Timing, price, volume, or any mathematical model are used to define the sets of instructions.

Apart from providing profit potential for traders, algo-trading makes markets more liquid and trading more methodical by removing the influence of human feelings on trading.

Example of Algorithmic Trading

The Amsterdam Stock Exchange (AEX) and the London Stock Exchange (LSE) both list Royal Dutch Shell (RDS) (LSE). To find arbitrage possibilities, we first create an algorithm. Here are a few important points to consider:

• The AEX trades in euros, whereas the LSE trades in pounds sterling.
• Due to the one-hour time difference, AEX begins one hour before LSE, with both exchanges trading together for the next few hours until trading exclusively on LSE for the last hour when AEX shuts.

Can we look at the prospect of arbitrage trading on the Royal Dutch Shell stock, which is listed in 2 separate currencies on these two markets?

Things Required

• A programme that can monitor present market prices on a laptop.
• Both the LSE and the AEX provide price feeds.
• A GBP-EUR forex (foreign exchange) rate stream.
• The capacity to place orders and route them to the appropriate exchange.
• Historical price feeds can be used for backtesting.

Software Requirements

• Take a look at the RDS stock price feeds from both exchanges.
• Convert the price of one currency to another using the relevant international exchange rates.
• If there is a significant enough price difference (after accounting for brokerage expenses) that results in a profitable possibility, the programme should buy on the lower-priced exchange and sell on the higher-priced exchange.
• The arbitrage benefit will ensue if the orders are performed correctly.

How Does Algo Trading Work?

A trader performs simple trading requirements:

When a stock’s 50-day moving average crosses above its 200-day moving average, buy 50 shares. (A moving average helps to balance out day-to-day price changes and so finds trends by taking an average of previous data points.)

When the stock’s 50-day moving average falls under the 200-day moving average, it’s time to sell.

A computer programme will continually watch the share price (and the moving average signals) and make buy and sell orders when the preset circumstances are met using these two simple commands.

The trader no longer requires to physically enter orders or check live prices and graphs. This is done automatically by the algorithmic trading software accurately detecting the trading chance.

Originally published at https://profitmust.com on December 17, 2021.